Economic links from bonds and cross-stock return predictability

Jian Feng; Xiaolin Huo; Xin Liu; Yifei Mao; Hong Xiang

doi:10.1016/j.jfineco.2025.104110

Journal of Financial Economics Vol. 171 2025

Economic links from bonds and cross-stock return predictability

Jian Feng^1,2; Xiaolin Huo³; Xin Liu^4,5; Yifei Mao⁶; Hong Xiang⁷

¹ Peking University · ² University of Hong Kong · ³ University of International Business and Economics · ⁴ University of Macau · ⁵ University of Saint Joseph · ⁶ Santa Clara University · ⁷ Hong Kong Polytechnic University

Abstract

Identifying firms’ bond-market-specific economic links through credit-rating comovement of their corporate bonds, a long-short strategy for stocks based on these links generates a risk-adjusted alpha of 0.45% per month, which cannot be explained by existing economic links in the literature. Market segmentation between the equity and bond markets appears to be the underlying mechanism: (i) The cross-return predictability is muted in the bond market; (ii) The cross-return predictability is mitigated in the presence of cross-holding investors; (iii) Equity analysts slowly incorporate information from rating-comovement links to their forecasts.

DOI: 10.1016/j.jfineco.2025.104110
Volume: 171
Pages: 104110
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Economic links from bonds and cross-stock return predictability

Abstract

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